Understanding U.S. Sanctions Against Russia and their Potential Impact on the Financial Industry

Understanding U.S. Sanctions Against Russia and their Potential Impact on the Financial Industry

In response to Russian annexation of the Crimean region of Ukraine, the United States implemented targeted sanctions against certain Russia and Ukrainian interests. The sanctions are historic in that they have the ability to target substantial interests in a major global market, in contrast to other sanctions that targeted certain interests in markets that have been less integrated in global finance, e.g., the Sudan, Iran, and Syria.

Since listing Bank Rossiya, the Obama Administration has held in reserve the threat of further banking sanctions. However, the costs were immediate. Other banks had immediate regulatory costs of determining that they were free of Bank Rossiya transactions, even those that were several steps removed. The ambiguity of the Executive Order and its broad grant of authority added to the uncertainty. That uncertainty resulted in costs, as businesses and banks tried to determine where a safe line would be for on-going transactions that might involve other Russian banks. The net effect (while not confirmed) likely was a migration of funds to perceived safer (non-Russian) institutions.

Also impacting business flow was action by the U.S. Commerce Department's Bureau of Industry and Security (BIS). BIS released a notice that, as of March 1, 2014, it had placed a hold on the issuance of licenses to permit the export or re-export of certain dual-use, U.S.-origin items and technology to Russia. BIS will continue this practice until further notice. Similarly, on March 1, 2014, the U.S. State Department's Directorate of Defense Trade Controls (DDTC) stopped authorizing exports of "defense articles and defense services to Russia" until further notice.

The net effect of these agencies' actions is hard to determine. The actions have the potential of disrupting product and project flow, even for projects dependent on Russian technology. In that regard, several US space companies rely on Russian technologies and their access to those technologies can implicate licensing requirements. At present, those licenses will not be forthcoming. That, in turn, can impact downstream project milestones and related financing.

OFAC and FinCEN Licensing and Reporting Requirements

The newness of these sanctions and the fact that they may increase in scope means the full impact on U.S. and other financial entities is difficult to gauge. At a minimum, however, the sanctions warrant attention, caution and coordination with State and Treasury Departments to mitigate potential business disruptions. For United States entities seeking to wind-down or exit from preexisting business relationships with sanctioned entities, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) expects financial entities and other companies to request specific licenses detailing the transactions or business relationships requiring wind-down or other mitigation. OFAC may issue eventually a General License for wind-down activities. OFAC has not yet received sufficient specific license applications to warrant issuing such a General License, but U.S. and other financial institutions need to monitor developments in this regard.

For financial institutions operating in Russia, either directly or indirectly, there is an increased need to be aware of the likely overlap with new Russian sanctions and the controls of the Enforcement Division of the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury. FinCEN was established to enforce the legislative framework known as the Bank Secrecy Act (BSA) and requires U.S. "financial institutions" – including many types of businesses in addition to traditional banks, currency exchangers, and credit unions – to assist the United States government in combating money laundering (view the following alert: Putting the "Enforcement" into the Financial Crimes Enforcement Network ). This is achieved through a number of regulatory mechanisms overseen by FinCEN, including requiring institutions to implement comprehensive anti-money laundering (AML) programs and to submit Suspicious Activity Reports (SARs) when potential money laundering or other suspicious activity occurs in a transaction.

In light of the Russian sanctions, financial institutions operating in that environment should now anticipate having to file SARs with greater frequency. While financial institutions are provided civil immunity from liability for filing a SAR that calls out the conduct of a party, at the same time these institutions may be more likely to face civil penalties for their failure to file SARs when circumstances under the new sanctions raise questions. This may mean modifying internal protocols for assessment of suspicious activity so that the financial institution can demonstrate empirically that proper (and modified) processes were followed. For example, this protocol now should call out current sanctions and provide guidance with respect to transactions that appear on the margin of permitted conduct in light of these particular sanctions.

In turn, financial institutions can expect that SARs involving conduct that might violate these sanctions may lead to additional questions from federal law enforcement agencies. Records and back-ups in support of the SAR and the institution's protocols should be designed with this in mind.

Additional Risks Presented by 18 U.S.C. § 4

The federal misprision of felony statute, 18 U.S.C. § 4, provides yet another reason for businesses and financial institutions to report to the relevant government authorities activities that appear to violate the new Russian sanctions. Section 4 of Title 18 provides:

"Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both."

On discovery that employees, agents, banking clients, or other third parties have relationships or transactions that violate the Russian sanctions, corporate officers and in-house counsel might be tempted to determine that the circumstances allow a quiet, gradual withdrawal from the conduct, instead of an immediate termination of the activity or submission of a wind-down license application to OFAC. Indeed, company officials might be inclined – as a result of often well-placed feelings of loyalty – to preserve a long-established business relationship or to help a long-term business partner or banking client mitigate their error by allowing the Russian sanctions violations to end gradually over time without drawing the attention of government enforcement officials.

Accordingly, when a company or financial institution learns of a violation of the Russian sanctions – even after the fact – the prudent course of action for the company or financial institution is to protect itself by reporting the violation to the relevant government enforcement agency. At the very least, the company or financial institution should avoid any conduct or inaction that prosecutors – after the fact -- could reasonably interpret as an attempt to allow the sanctions violations to end quietly and gradually over time.

The team at Holland & Hart is prepared to assist with any of these compliance issues, OFAC wind-down license requests, internal processes, and government reporting measures. We will continue to provide you with updates regarding how to comply with this new, changing sanctions regime.

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